SOX Compliance: Regulating accounting standards

Organizations rely on top level managers to understand the accounting principles involved in making their company run successfully. The financial performance of the organization is actually the heart of the company, which makes every other department and process flow smoothly. In order for this to be achieve, the organization must follow specific accounting standards, also known as GAAP or generally accepted accounting principles, enforced by the Sarbanes-Oxley Act. This act was developed and put into legislature by the US House of Representatives in 2002, after corporate financial scandals were revealed. The government wanted to put a stop to organizations following the same financial path as Enron and WorldCom.

Organizations are required to be SOX compliant and if found incompliant, they could face very harsh penalties such as fines and prison time. The Sarbanes-Oxley Act requires organizations to report specific data on their financial annual reports. Such information which must be disclosed is internal controls, audit committee structures, and codes of ethics and conduct. Under this act, organizations must keep tract of all financial data and transactions that occurred and it must be saved for at least five years. But, who is responsible for all of this information? The CEO and the CFO are responsible for maintaining accurate records and for keeping the company under compliance. They are responsible for ensuring that all accounting standards are properly being met and that the organization is following correct accounting practices.

An example of how companies must comply with this act is how an organization handles its audit, both internally and externally. CEOs and CFOs are required to sign an attestation, which holds them liable for any financial reporting. This attestation is a formal legal document, which forbids financial officers from being able to testify that they weren't aware of such financial transactions that occurred. This document state that these officers have reviewed all of the data and that they are responsible for any internal controls that have been taken place. This is all covered in Section 302 of the act.

Another complicated and strict part of the Sarbanes-Oxley Act is Section 404. This section of the act forces organizations to monitor and implement strategic changes that effect how their entire financial processes are ran. This is to protect the organizations from risk. This includes their information systems and how their systems are operating and secured. The PCAOB, Public Company Accounting Oversight Board is a newly created organization that helps external auditors decipher whether or not the organizations they are auditing are up to par with SOX compliance and if they should sign off on the attestation. If internal controls are inadequate, whether any false data has been reported or not, organizations could still be penalized and found incompliant.

In the end, some companies would rather not have to deal with all of the deadlines and regulations of the Sarbanes-Oxley Act. But, in reality, these companies should have been following a strict set of accounting principles and standards anyways. We have seen a huge decline in the number of scandals reported since this act has been regulated.

For more free information on the Sarbanes-Oxley Act and accounting principles, visit www.howtodoaccounting.com